Over the last few weeks, we have analyzed several factors that are shifting or have the potential to shift U.S. wheat value toward wheat importers. A combination of lower futures prices, a break in dry bulk freight prices, an increase in planted area, and the potential for a weaker dollar all point to a wheat market that has turned to favor buyers after two years of price risk. Though it is the most unpredictable of all the factors influencing U.S. wheat prices, the weather is arguably the most critical component in determining U.S. wheat production and price.

El Niño Southern Oscillation

In a cycle called El Niño Southern Oscillation (ENSO), meteorologists study the air and water conditions in the equatorial Pacific and the subsequent impact on global weather patterns.

This image shows a map of the world and the expected rainfall patterns in different regions in a La Nina weather pattern.

Three consecutive La Niña weather events have brought increased moisture to Australia, boosting their wheat production. Meanwhile, drought conditions have persisted in Argentina and the U.S., severely affecting production and yields. Source: International Research Institute for Climate and Society.

“Triple Dip” La Niña

Usually lasting nine to 12 months, the most recent La Niña event persisted for three cycles, marking the first “Triple Dip” La Niña since 2001.

The three consecutive La Niña events have brought above normal rains to Australia during their wheat growing season. As a result, Australia has boasted three years of record wheat production. The average production from 2020-2023 is 66% higher than the previous five-year average.

Simultaneously, the La Niña weather event brought dry conditions to the U.S. and Argentina. U.S. Hard Red Winter wheat (HRW) production, the largest class of U.S. wheat grown primarily in the U.S. Southern Plains, decreased by 29% on the year to 14.5 MMT due to severe drought in the region. Likewise, USDA estimates put Argentine wheat production at 12.9 MMT, down 41% from the year prior and 33% from the five-year average, with persistent drought also acting as the primary cause.

Chart shows Australian wheat production, domestic use and exports over the past 10 years to show the effects of La Nina.

Australia has produced three consecutive record wheat crops as increased moisture benefitted its growing regions. As a result of increased production and stocks, Australian wheat exports have also reached record highs. Source: March USDA World Agricultural Supply and Demand Estimates.

Chart shows Argentinian wheat production, domestic use and exports over the past 10 years to show the effects of La Nina.

Drought severely impacted 2022/23 wheat production in Argentina. Source: March USDA World Agricultural Supply and Demand Estimates

A Break in The Cycle

In recent weeks, climate experts have predicted the end of La Niña, with an increased likelihood of an El Niño weather event forming. As the La Niña dissipates, there is potential for increased moisture in the U.S. Southern Plains and Argentina, while Australia will likely see drier conditions.

This map of the world shows rainfall patterns in regions from an El Nino patters, relative to La Nina patterns.

An El Niño weather event could bring dryness to Australia and increased precipitation to Argentina and the U.S., potentially favoring western hemisphere wheat production regions. Source: International Research Institute for Climate and Society.

What Does This Mean?

The market has already begun to weigh the impact of the shifting weather patterns. The Australian Bureau of Agricultural and Resource Economics and Statistics has already lowered 2023/24 wheat production estimates by 28% to 28.2 MMT in response to the new weather data.

As the weather changes and the potential for moisture increases in the U.S. Southern Plains, the production outlook in the U.S. may improve. Increased production would help take pressure off the tight U.S. balance sheet with the potential to bring down relatively high U.S. wheat export prices. Nevertheless, given the unpredictability of the weather, the actual impacts will not be known until well into the 2023/24 marketing year.

By USW Market Analyst Tyllor Ledford


By Matthew Weaver, Copyright © Capital Press, February 8, 2023, Excerpts Reprinted with Permission

Wheat prices “probably won’t be quite as good [for farmers]” in 2023 as they were last year, a top grain economist says.

“We won’t see last year’s prices, we’ll be several dollars short of that,” said Randy Fortenbery, the Thomas B. Mick Endowed Chair in Small Grain Economics at Washington State University, told farmers during the Spokane Ag Show. “We can’t be thinking we’re going to see 2022 wheat prices … unless there’s some other shock that’s not being anticipated.”

Soft white wheat ranged from $8.45 to $8.55 per bushel on the Portland market as of Feb. 8. Fortenbery advised farmers to be careful about assuming they’ll see prices above $10 a bushel. He expects wheat prices to trade within a $3 to $3.50 a bushel range. About $9.25 to $10 per bushel would be the high end, he said. [Editor’s Note: USDA lowered its February forecast of average farm gate wheat prices in 2023 to $9.00 per bushel.]

A Different of Opinion

The International Grains Council and USDA have conflicting forecasts for global wheat trade, Fortenbery said.

The council expects total world ending wheat stocks to be up 3% compared to last year and a 1.3% reduction in world wheat trade, which suggests a decline in prices. USDA projects world wheat stocks to be down 2.6% and trade to be up 5%, which suggests a price increase. Fortenbery said he leans toward the international council’s projections.

Both agencies agree the combination of Russia and Ukraine wheat exports will be up compared to last year. The flow of grain out of the Black Sea market appears to have stabilized the price impact of the conflict, Fortenbery said.

SW, SRW Back at Parity

The relationship between Portland white wheat prices and Chicago [soft red winter] wheat futures prices is returning to normal, after white wheat reached a peak of $3 above Chicago futures prices in recent years. The norm for Portland is closer to $1 above Chicago.

Because of the extreme difference, soft white prices didn’t respond last year when Russia invaded Ukraine, while Chicago [soft red winter] wheat prices “exploded,” rising to meet the higher white wheat prices, Fortenbery said. The relative prices are back in synch with each other, he said.

Line chart of USDA and U.S. Wheat Associates data showing wheat prices for soft white and soft red winter exports have converged to near parity in 2022/23.

U.S. soft white and SRW export prices have converged in 2022/23 to near-parity. Source: U.S. Wheat Associates (USW) Price Report – February 3, 2023.

“If the Black Sea ends up being a problem again this spring, we’ll get some bump out of that,” he said.

The market doesn’t currently expect that, but risk remains, Fortenbery said.

Commodity prices generally look favorable in the next few months, but input costs are also at historic highs, Fortenbery said. Almost every major expense category was significantly higher last year compared to 2021; some were up to 60% or more.

He’ll be watching general inflation, which affects interest rates and production loans, and natural gas and refined fertilizer shipments from the Black Sea.

For additional information on U.S. wheat export price trends, see this Wheat Letter post from January 30, 2023: Wheat Prices Trend Lower Even As Uncertainty Continues.